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International Transmission of the Business Cycle in a Multi-Sectoral Model

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Abstract

Multi-country models have not been very successful in replicating important features of the international transmission of business cycles. This paper extends previous work by introducing multiple sectors and traded intermediate inputs. Trade in intermediate goods represents approximately 60% of total trade and could significantly affect the main features of the international transmission of business cycles. In our model, imperfect substitution between domestic and foreign goods leads to cross-hauling in intermediate goods. As well, with more than a sector within each country there may be important inter-sectoral spillover effects that alter the transmission of shocks across countries. We show that these features of the model are important and can generate cross-correlations of output levels, employment and investment that are compatible with the data. Les modèles multi-pays n'ont pas réussi à reproduire les faits saillants de la transmission internationale du cycle économique. Dans ce texte nous incorporons des secteurs multiples et le commerce international des biens intermédiaires dans un modèle de la transmission du cycle. Les flux de biens intermédiaires constituent 60% du commerce international et pourraient avoir un impact important sur la transmission internationale des cycles. Dans le modèle, la substitution imparfaite entre les biens domestiques et étrangers mène à l'exportation et à l'importation simultanées des mêmes types de bien. Puisqu'il y a plus d'un secteur dans chaque pays, il y a des effets de débordement intersectoriels et internationaux qui peuvent modifier la transmission de chocs entre pays. Nous montrons que ces aspects de notre modèle ont des conséquences importantes et que le modèle peut engendrer des corrélations croisées des niveaux d'output, d'investissement et de consommation qui sont compatibles avec les données.

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Bibliographic Info

Paper provided by CREFE, Université du Québec à Montréal in its series Cahiers de recherche CREFE / CREFE Working Papers with number 60.

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Length: 25 pages
Date of creation: Mar 1998
Date of revision:
Handle: RePEc:cre:crefwp:60

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Keywords: Open economy macroeconomics; Business cycles; Intermediate goods; Sectoral shocks;

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References

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  1. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1994. "Dynamics of the Trade Balance and the Terms of Trade: The J-Curve?," American Economic Review, American Economic Association, vol. 84(1), pages 84-103, March.
  2. Christian Zimmermann, 1995. "International Trade over the Business Cycle: Stylized Facts and Remaining Puzzles," Cahiers de recherche CREFE / CREFE Working Papers 37, CREFE, Université du Québec à Montréal, revised Aug 1997.
  3. Mendoza, Enrique G, 1991. "Real Business Cycles in a Small Open Economy," American Economic Review, American Economic Association, vol. 81(4), pages 797-818, September.
  4. Devereux, Michael B. & Gregory, Allan W. & Smith, Gregor W., 1992. "Realistic cross-country consumption correlations in a two-country, equilibrium, business cycle model," Journal of International Money and Finance, Elsevier, vol. 11(1), pages 3-16, February.
  5. Backus, David K. & Crucini, Mario J., 2000. "Oil prices and the terms of trade," Journal of International Economics, Elsevier, vol. 50(1), pages 185-213, February.
  6. Alan C. Stockman & Linda L. Tesar, 1991. "Tastes and technology in a two-country model of the business cycle: explaining international co-movements," Working Paper 9019, Federal Reserve Bank of Cleveland.
  7. Steve Ambler & Emanuela Cardia & Christian Zimmermann, 1999. "International Business Cycles: What are the Facts?," Cahiers de recherche CREFE / CREFE Working Papers 90, CREFE, Université du Québec à Montréal.
  8. Kydland, Finn E & Prescott, Edward C, 1982. "Time to Build and Aggregate Fluctuations," Econometrica, Econometric Society, vol. 50(6), pages 1345-70, November.
  9. Baxter, M., 1994. "International Trade and Business Cycles," RCER Working Papers 390, University of Rochester - Center for Economic Research (RCER).
  10. Michael A. Kouparitsas, 1996. "North-South financial integration and business cycles," Working Paper Series, Macroeconomic Issues WP-96-10, Federal Reserve Bank of Chicago.
  11. Patrick J. Kehoe & Fabrizio Perri, 2002. "International Business Cycles with Endogenous Incomplete Markets," Econometrica, Econometric Society, vol. 70(3), pages 907-928, May.
  12. Robert Kollmann, 1995. "Consumption, real exchange rates and the structure of international asset markets," ULB Institutional Repository 2013/7642, ULB -- Universite Libre de Bruxelles.
  13. Heathcote, Jonathan & Perri, Fabrizio, 1999. "Financial Autarky and International Business Cycles," Working Paper Series in Economics and Finance 320, Stockholm School of Economics, revised 30 Apr 2000.
  14. Hornstein, Andreas & Praschnik, Jack, 1997. "Intermediate inputs and sectoral comovement in the business cycle," Journal of Monetary Economics, Elsevier, vol. 40(3), pages 573-595, December.
  15. Long, John B, Jr & Plosser, Charles I, 1983. "Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 91(1), pages 39-69, February.
  16. Clinton R. Shiells & Kenneth A. Reinert, 1993. "Armington Models and Terms-of-Trade Effects: Some Econometric Evidence for North America," Canadian Journal of Economics, Canadian Economics Association, vol. 26(2), pages 299-316, May.
  17. Marianne Baxter & Mario J. Crucini, 1992. "Business cycles and the asset structure of foreign trade," Discussion Paper / Institute for Empirical Macroeconomics 59, Federal Reserve Bank of Minneapolis.
  18. Cardia, Emanuela, 1991. "The dynamics of a small open economy in response to monetary, fiscal, and productivity shocks," Journal of Monetary Economics, Elsevier, vol. 28(3), pages 411-434, December.
  19. Baxter, Marianne, 1995. "International trade and business cycles," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 35, pages 1801-1864 Elsevier.
  20. Arvanitis, Athanasios V & Mikkola, Anne, 1996. "Asset-Market Structure and International Trade Dynamics," American Economic Review, American Economic Association, vol. 86(2), pages 67-70, May.
  21. Michael Horvath, 1998. "Cyclicality and Sectoral Linkages: Aggregate Fluctuations from Independent Sectoral Shocks," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(4), pages 781-808, October.
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  1. > Macroeconomics > Economic Fluctuations > Real Business Cycle Theory > International RBC
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